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How Much Rent Can I Afford? What To Consider Before Signing That Lease

how much rent can I afford

Like a Russian Matryoshka doll, the question— “how much rent can I afford” nests several questions within itself. There isn’t simple arithmetic that will get you to the exact number. There is a lot to take into consideration.The reality is, you really just want to get out of your parent’s basement. We’re here to help.

The standard rule for “how much rent can I afford” revolves around the 30% rule, which says your housing costs shouldn’t be more than 30% of your household income. If you earn $50,000, you shouldn’t pay more than $1,250 a month. But this isn’t always the case, particularly in some more expensive metro areas, where some need to adhere to a 40% rule.

Investopedia has an easy way of calculating this:

One rule of thumb involves dividing your pretax earnings by 40. This means that if you make $100,000 a year, you should be able to afford $2,500 per month in rent.

Based on years of home-hunting, I realized that there are some tried and tested truths about rent affordability. This article will share those with you, but first, let’s take a quick look at which factors affect rents across the nation.

How much can I afford for rent: The 30% rule

Most believe the rent they pay, or the housing expenses incurred, shouldn’t be more than 30% of their total gross income. The 30% rule of thumb that has become so widespread, is a vestigial leftover from an older era.

Where does the 30% rule come from?

Buckle up, let’s take a quick trip down memory lane. In 1937, the Senate brought forth the National Housing Act, during the period best known as the New Deal Era that stipulated that those with income, not more than 5 or 6 times the rent they pay would be eligible to receive housing subsidies.

In 1969, the Senate passed the Brooke Amendment that stipulated that the rent should be maximum of 25% of tenant’s income. This was later revised to 30% in the 1980s. The rates were determined on average income at the time.

Since then, these benchmarks have become widely accepted and later successfully morphed itself into a popularized rule of thumb. Just like old wives tales, most of these are not based in reality. Except for the fact that a cat will steal your baby’s breath if you let them near the newborn. We all know that’s true.

The 30% rent affordability benchmark was established 81 years ago. Since then, we’ve seen drastic changes in people’s lifestyles, spending habits, and the overall financial landscape.

If in the 80s people were concerned with car loans, today they’re concerned with student loans and other financial obligations. There are over 37 million student borrowers who have racked up over 1 trillion dollars in debt. Student debt has far exceeded credit card debt. In the same way, consumer spending habits have changed.

The debt levels among Americans have fallen but 35% of a Money Rates survey respondents are still worried about being able to meet their non-debt financial obligations like a mortgage, bills, or rent payments.

75% of those surveyed already feel stressed about money, and have gone through periods of “great distress” during the past month. The feeling of financial insecurity looms large in the minds of every 4 of 5 Americans.

Rent is increasing at a higher rate

The second reason we need to reconsider the 30% rule is that it hasn’t been able to keep up with ever-increasing rents. As inflation increase, so too does rent. But— rents have risen far more than inflation-adjusted values. At the same time wages are lagging behind.

The median rent in the US for 2017 was $864 per month according to data from the US Census Bureau.

how-much-rent-can-i-afford

Consider that the median rent during 1990s stood at $425.

If we calculate the impact of inflation alone then $425 should have had become $680 in 2017, but that isn’t the case. It’s $864. The median rent has doubled in 20 Years. According to a report from Apartment List, rent growth hit a plateau in 2016, but rose consistently between .5% to .7% in 2017.

Rents in a metro city are a function of the available space. If space’s limited, demand goes up and so does the rent. High rent is the norm in most metro cities.

Wages haven’t risen proportionately

A report from National Low Income Housing Coalition, cites that there’s no single city in the US where someone can work on a 40-hour minimum wage job and be able to afford a 1 bedroom home. Think about that for a minute!

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On average, for a minimum wage worker to be able to afford a one bedroom home, they have to earn at least $21.21 an hour working 40 hours a week. This is almost three times the minimum wage!

For a 2-bedroom apartment, you’ll need to drop $5043 as a monthly rent in a place like San Francisco. The median household income in San Francisco is 78k, which means if belong to the median you would have to shell out over 77% of your income for an apartment. Wages are far behind, particularly in hot markets.

Renting a 2-bedroom place in New York City will set you back by $3,692 a month, on average. On the other hand, the median household income in the city is 50k. That means people earning in median income would have to shell 87% of their income on rent.

That’s true not only for metros but also for minimum wage earners in all major U.S. cities as we saw above. Even back in 2014, tenants spent 35 – 40% of their income in the top 10 metros on rent.

Top Ten Metros

Highest Share of Income Spent on Rent

Miami, FL

39.9%

Detroit, MI

35.4%

Los Angeles, CA

35.3%

Fort Lauderdale, FL

35.2%

Riverside-San Bernardino, CA

35.1%

West Palm Beach, FL

34.3%

Long Island, NY

34.0%

Orange County, CA

33.9%
Orlando, FL

32.8%

Sacramento, CA

32.6%

So, do you have to pay 40 to 70% of your income as rent? Not necessarily. Consider that households spending more than 50% on housing are classified as severely cost burdened

Instead, here are the factors that should drive your decision making.

What to consider when figuring out how much rent you can afford

How much rent can I afford: Consider basic needs

You should rent a house that ticks all your basic needs. For that to happen, clarity needs to trump desire. You may not be able to afford that penthouse with the nice view and fancy doorman.

Do you need that Victorian style staircase or rooftop pool? Sure, it looks amazing, but the home down the road is $300 cheaper.

A home with spacious backyard has a nice ring to it, and conjures up images of barbecuing with friends.

You might be ready to drop a couple hundred bucks more for a place with a nice pinewood forest in the backyard, but then realize you don’t even spend a lot of time in your home.

Do the requirements of your lifestyle dictate the need for a large backyard? If so, choose a home that has one. If not, don’t be carried away by non-essential features.

Do you need that extra bedroom right now, or can an inflatable bed in the hall suffice when a guest drops by?

What are the critical pieces you need in a home? Backyard? Proximity to work? Office? A particular neighborhood? Garage? Walkability? A big house? Pick what is most important to you, and toss the rest.

A big house looks nice. But most people find maintaining a small house or condo to be much easier. You need to spend less on interior decorations as well.

Have a car? You need a garage. Want to grow your own food? A backyard is ideal. Only spend on features you need.

Being flexible is key

Most people settle for a costlier home to save on commute times. If they find that the school or office is nearby they’re prepared to spend more on rent.

But the times, they are a changin’!

Data from a survey conducted by Upwork and Freelancers Union says that 57.3 million Americans are freelancing. Most of these freelancers are location independent. This figure has increased by 30% compared to last year and comprises of 36% of the US workforce.

The same survey also predicts that the majority of the workforce will be freelancers by 2027, or sooner.

Being location independent gives you the freedom to choose places that have lower rent.

A CNBC report lists the following cities as the least expensive in terms of rent in the US.

how-much-rent-can-i-afford

If you choose to rent at Toledo, Ohio you only need to pay $550 for monthly rent. Memphis or Glendale aren’t too shabby either.

Proximity to school isn’t as important as it once was either.

A report from National Center for Educational studies found that 36% of homeschooling families point out moral or religious instruction as the primary driver behind the decision. For the majority, over 81% of families cite concern over school environment the main reason.

And it’s not just parents providing the schooling. Online charter schools make online remote instruction possible and accessible. A private or public school made of concrete isn’t the only place where your children can learn stuff.

And, with advances in AI, the days aren’t far when robots will be instructing our kids. The robots are coming!

Physical proximity isn’t the same as it was before. Even consider Amazon and Walmart, where delivering groceries and household goods right to your home has minimized the need for nearby commercial space.

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So, how much rent can I afford?

That’s up to you my friend. Where you live, what your current debt load is, what your requirements are, and more, all factor into how much you should pay for rent.

You need to calculate all your housing expenses and figure out that as a percentage of your household income. If you’re in the 15-30% range, you’re doing pretty good, anything higher than that you need to seriously consider your options.

Most experts agree with the 15-30% range, and under the right circumstances with a low outside debt load, up to 40% can be advisable.

Concluding thoughts

The question of how much can I afford for rent seems rooted in money but when you really think about it— the question encapsulates many other questions and needs such as:

  • Children’s education
  • Neighborhoods
  • Amenities
  • Opportunities
  • Office location

And so on.

It’s additionally a question of budgeting too. A budget should factor in all such expenses listed above and only then should you decide on the rent amount that you can practically afford.

You should also remember the fact that you need to spare some amount for emergencies—medical and otherwise. There should also be some amount saved for retirement. Don’t drop everything on rent.

You can also get creative. If you have an extra room, or can afford the added cost when you pick a place to rent, you may be able to sublet that to a long-term renter or on a short-term rental platform like Airbnb. Be sure to discuss with your landlord.

The right percentage of your salary that goes towards rent shouldn’t be calculated by what others said and did long ago. It should be dictated by your financial conditions, nature of your job, and other factors like the education of your child.

Take all of these important considerations into consideration, and avoid going close to, or over, 40% of your household income.

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